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Cinnabar Insights

Investor Behaviour in Volatile Times

As we near the end of a very exciting 2017, we are sure that you all are very much looking forward to a relaxing break over the festive season. It is always during this time, that we take time to reflect on the year that has passed, and we can all agree it was a very interesting year with much political uncertainty and financial market surprises.

If we turn back the clock to December 2016, we don’t think that anybody would have expected the JSE All Share to have produced a return to the end of November 2017 of 21.4%, while the beloved bonds of 2016 only returned 4.3% (as per the ALBI close on 30 November 2017). We do however have to ask ourselves where all the performance came from.

Looking at a contribution table of the JSE Top 40, the big gains are easily identified. We can see that this has been the year with Naspers accounting for more than 50% of the JSE Top 40 performance from 1 January 2017 to 30 November 2017. So, in hindsight, if your portfolio did not hold a significant portion on Naspers shares, your return would have been a modest single digit return at best.

It seems that one cannot attend a social gathering anymore without the very hot topic of crypto-currencies and Bitcoin popping up. Although we like the Blockchain technology which is the basis for Bitcoin and other crypto-currencies, we believe that the volatility and mass price appreciation is definitely something to be weary of. We decided to do some analysis on Bitcoin and how it compares to markets we are more familiar with. Below is some high-level analysis of Bitcoin vs the Equity General Sector in South Africa – the category where all local Equity Funds are housed.

Cumulative growth: Bitcoin vs the Equity General Sector
If one had invested in Bitcoin since it launched in 2010,
one would have enjoyed roughly a 100 000% return. This is assuming you could stomach the volatility and stay invested for the 7 years. It is important with all investments to understand your Risk Adjusted Returns, that said, how much return benefit you get for consuming one unit of risk.

When comparing Bitcoin to the General Equity Sector in a 1 Rolling Reward to Risk Ratio it is apparent that it is much lower in comparison than any other asset class, but this shows us that given the volatility of Bitcoin, investors are not being rewarded as much as in the General Equity Sector for the risk they are consuming in the Bitcoin Market.


If we analyse the volatility in the Bitcoin Market by plotting the rolling 1 Year Standard Deviation, we can see astronomical volatility numbers coming through, from as low as under 1000% to as high as 5000%. It seems almost unbearable to stay invested during such high levels of volatility but yet the screaming demand for Bitcoin continues to drive the price higher showing that there is still a very active demand for the cryptocurrency.

One thing to notice is that the 1 Year Rolling Standard Deviation is definitely trending down. One might ask, is Bitcoin finally starting to show signs of stabilization? One thing is for sure is that the 1 Year Rolling Standard Deviation needs to be well below 1000% for us to even begin discussing normality in the Bitcoin market.

The reasons for this can de nitely be blamed partially on the depressing political climate in SA and consequently the slump in the economy which has entered a technical recession.

Investors seeing the poor returns of the local equity market over the past 3 years are likely to think that they should ignore growth assets entirely and move more into xed interest asset classes and cash because there are better returns to be had and there is safety away from the local equity market which they believe could fall if the SA political environment worsens.

The reality is that this may be true for the short term, however, if they make these changes to their long-term investments which are there to provide for their retirement in decades to come, they could be making a catastrophic mistake. It is a reality that growth assets like equity do return much more returns than lower risk asset classes over time (approximately 7 years or longer).

Not holding enough growth assets is, in fact, a much larger (opportunity) risk than the short term market volatility. A further reason for not going completely into local xed income assets only when investing for retirement is that xed income assets, in particular, SA cash is totally correlated to the rand and hence the SA political situation, while SA equities being dominated by many multi-national companies that earn much of their revenue outside of SA offer a great hedge to a potentially weakening rand.

Market Insights

United States

Economic data highlighted that the US economy showed resilience in the third quarter, with GDP numbers revised upwards to an annualised 3.3%, the fastest rate in three years. The unemployment rate fell to 4.1%, its lowest level since October 2000 (albeit that labour force participation is at low levels). On the policy front, Jerome Powell, nominated as the next chairperson of the Federal Reserve, spoke before Congress, presenting himself as an extension of the central bank’s policies under Janet Yellen. The Senate Republicans outlined their vision for overhauling the tax code, proposing a one year delay in President Trump’s top priority of cutting the corporate tax rate from 35% to 20%.

America stepped up the pressure on China submitting a formal document to the World Trade Organisation setting out its reasons why China should be denied “market economy” status. Without the tag, China can be subjected to higher duties on exports.


United Kingdom

November saw the Bank of England raising its benchmark interest rate by 0.25% to 0.5% for the first time in over a decade. Inflation crept up to 3% primarily due to currency weakness. The data suggests mixed signals as the UK economy remains under pressure with GDP growing 1.5% year-on-year, lagging significantly behind the EU average since the start of the year, and with continuing negative real wage growth, private consumption is being fuelled by consumers running down their savings.

UK reportedly offered to pay a Brexit settlement of more than €50 billion in an attempt to move talks onto the negotiation of a future free trade agreement.


With a Q3 GDP growth rate of 6.8% YoY, one would hardly associate this with an economy that is easing. Although China’s GDP has eased to 6.8% YoY in Q3, just one notch below the 6.9% Q2, it is comfortably in line to achieve this year’s 6.5% growth target.

October data for household consumption, manufacturing PMI, trade, industrial production, retail sales growth and the housing market have all contracted suggesting the economy may lose momentum in Q4. US President Donald Trump softened his tone in his recent visit to China, shifting the blame for trade imbalances from China to past US administrations.



On the European front, the economic growth remains buoyant with the economy growing at 0.6% in the third quarter and 2.5% over the past year.

October data showed unemployment in the Eurozone falling to 8.8%, its lowest level since 2009 (combined with the highest labour force participation ratio since the formation of the EU). Economic sentiment rose to its highest level since January 2001, composite PMI increased to 57.5 index points from 56 signalling brisk activity. Early data for the fourth quarter points to another period of strong economic growth.

The ECB announced a reduction its bond-buying program on 26 October, meeting analysts’ expectations. Starting in January 2018, the Bank will reduce the monthly pace of asset purchases from EUR 60 billion to EUR 30 billion.

South Africa

S&P have pushed SA down one notch to BB, whilst Moody’s have put a negative outlook on SA’s Baa3 rating. On the economic front, recent data suggests that the economy continues to struggle after coming out of a technical recession in the second quarter.

Consumer inflation fell to 4.8%y/y in October 2017, in-line with expectations. The Reserve Bank decided to leave the Repo rate unchanged during November at 6.75%, as expected, citing inflation risks being to the upside.

Politically speaking there are only but a few days to go before the African National Congress (ANC)’s elective conference and the race is now tight between Nkosazana Dlamini Zuma and Cyril Ramaphosa, a win for Deputy president Cyril Ramaphosa could result in a marked rebound in business and consumer confidence.